Michael Bloom is vice-president and Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.

China National Offshore Oil Corp.’s proposal to acquire Nexen for $15-billion should be approved — with specific conditions attached that address the underlying concerns of citizens and business leaders. The minister of industry should require CNOOC to assume a set of “undertakings,” so that Nexen looks and acts like other Canadian companies operating on normal commercial principles. In addition, the minister should commit to modernizing the Investment Canada Act in the near future.

By creating the right policy framework around the Nexen deal, Canada would finally clarify for investors at home and around the globe what they can expect when making a major capital investment in the Canadian economy.

Canada has had a long history of large foreign corporate takeovers — including acquisitions by European state-owned enterprises (SOEs) — that government approved. However, BHP Billiton’s bid for Potash Corp. of Saskatchewan Inc. was arguably the most significant challenge to Canada’s investment review policy since the inception of the Investment Canada Act in 1985. When BHP Billiton ultimately abandoned its bid, broader concerns over SOE takeovers and the net benefit test were left unresolved.

The CNOOC-Nexen deal is another major challenge to Canada’s foreign direct investment policy. China has the means and the motivation to undertake a series of major resource mergers and acquisitions in Canada. What it needs is the opportunity.

The Conference Board’s recent study, Fear the Dragon: Chinese Foreign Direct Investment in Canada, pointed out that Canada’s foreign direct investment review process is essentially a political risk management tool. Chinese investments are politically contentious for two reasons: Canadians are generally wary of major foreign acquisitions in the resource sector; and, more importantly, large Chinese resource companies are either SOEs, or are, at some level, acting as agents of the state. Commercial intentions are often conflated with the political objectives of the primary shareholder — the Chinese central government and ultimately the Communist party.

Notwithstanding the political challenges, we expect that the deal will be approved. CNOOC has managed the politics well — wisely taking minority positions in Alberta oil sands plays, which allowed it to gain the trust of executives and shareholders.

From a corporate perspective, the deal is “friendly.” Nexen’s shareholders will receive a splendid 60% takeover premium on their shares, which will be recycled into other wealth- and job-creating investments in the Canadian economy. The deal has the support of Alberta Premier Alison Redford and her government. And the Harper federal government sees building stronger links to China as the cornerstone of its plans to diversify Canada’s energy markets.